Tuesday, April 5, 2016

I've been seeing more buzz lately on the subject of auto loans: they are surging, more and more loans are of subprime quality, it could the next bubble to burst, etc. Here are a few charts which help put the issue in perspective:

Outstanding motor vehicle loans (loans that have been securitized plus loans that are held by lending institutions) now exceed $1 trillion, and they rose by 8.6% last year. But the latest spurt of growth is relatively mild compared to what we saw in the 1980s, when loans were expanding at strong, double-digit annual rates. Loans today are only 25% above their high of 10 years ago.

As a percent of disposable income, motor vehicle loans today are about as much as they were in the late 1980s, and substantially less than they were about 10 years ago. However, interest rates on new car loans today are in the neighborhood of 4%, whereas they were much higher in the past.

The chart above looks at the burden (i.e., monthly payments as a % of disposable income) of all consumer debt and financial obligations. This confirms that the burden of motor vehicle loans today is much less than it has been in the past. Consumers in general are in pretty good financial shape these days.

As this article points out, new subprime auto loans last year were only about $20 billion, and represented less than one fourth of all new car loans. Only 3.4% of auto loans are seriously delinquent, and lenders have developed surprisingly innovative ways of repossessing cars these days.

However you look at it, motor vehicle loans today are not an obvious problem, and are very unlikely a tail big enough to wag the U.S. economy dog, at least for the foreseeable future.

One thing is forgotten--and I am not promoting moral hazard, but: When loans are not repaid, it is not a loss to the macroeconomy. It is a loss to the lender, and a gain for the borrower.

In the US economic system, there is a hazard to lenders when loans default, and if lenders pull in their hires, then our economy slows, as one way new money enters the economy is through bank lending.

If banks stop lending, there are other mechanisms available to inject new money into the economic system, such as quantitative easing (QE), which bypasses banks and prints new money to hand over to bondholders. Fiscal deficits may be another mechanism.

To be sure, the US system has a built-in magnifier for bad times: People stop repaying loans as times are tough, then banks stop lending as default rates are rising, asset values are falling (think property), and bank reserves reserves are shrinking below regulatory minimums.

But I doubt auto loans can trigger much.

BTW Tesla advance sales are amazing. And that is with current generation batteries. It may be batteries about double in performance in next several years.

I do not understand the "innovation is dead" crowd. I see (free-market driven) innovation everywhere. Incredible inventiveness, and now global. Drones? New medicines and treatments? Smartphones? Much better batteries? Shale oil drilling technology? Fuel cell cars? GPS? Google maps?

You may see Google fiber in your town, with download speeds 1000 times current. Depends on how bolloxed up your local government is.

I would love to set Google onto the current property recording, deeds and sales racket. How about a global national online register of properties, photographed from the air, each with a unique alphanumeric number, description, and legal restrictions online?

just to make sure I do understand your numbers correctly: On wikipedia I found a number of 127.500.000 cars were operated in the US by 2011. The loans shown in your diagram look like prox. 800.000.000.000 $ in 2011.

Just by calculating it says, that the average car in use was financed by loans at an amount of $ 6.275?

"There’s no doubt Donald Trump has energized and excited a great many people. And I’m grateful to him for doing so. The issues that brought those voters into the political world, the need to secure our border, stop illegal immigration, stop the failed immigration policies that have driven down wages and taken away jobs from struggling Americans.The need for a common-sense trade policy that doesn’t continue to ship jobs overseas and force Americans to compete on an unfair playing field."---Ted Cruz, interview with Time magqzine, out today.

Thank you for another great post. Great to know that wall street isn't destroying america through the auto industry.

I'd be really curious to get your thoughts on buying property. Currently the Bay Area and Austin have hit highs that seem a bit out of control. I really like the Portland area, but after reviewing Case-Schiller the real estate market in that area is up 11.3% YTD and is at an all time high. I know it's impossible to predict the future, but do you recommend buying an investment property? It seems that I can at worst break even on the investment, given that there aren't many houses available to rent (i.e. high demand but low supply for young professionals). This would be a property that I'd eventually want to move to down the road (Portland is water rich which will theoretically be more valuable down the road... see Michael Burry and investing in crops produced in water rich areas).

Directed to an earlier post here; quasi-monetarists seem to have stopped reflecting upon the fact that more money in circulation leads to inflation. I think that this is based on the idea that inflation is contained by looking at (mainly) the development of prices for consumer goods. And the conclusion is; since CPI is so low, lets print some money or even make a debt jubilee if need arise.

But as is well felt by most there is plenty of inflation around, but a much more unhealthy type of inflation than CPI and that is asset inflation. Asset inflation is inflation as well, as the majority of new money created in this process of increasing prices stems from assets that does not result in an increase in productivity. To make a generalised example take an existing house (global average) that has been sold recently and I can promise you that it bears more debt (inflation adjusted) than it did at any point in its history before. It does however produce the same thing as initially (more or less). More money is created yes, but no real capital, no additional wealth. It amazes me that money and capital are so easily mixed up. New money is nothing without new capital, and new capital comes from producing more with less and not from the circular process of bidding up prices for real-estate etc. That only results in paper profits and no increase in wealth. Which leads to the danger of asset inflation (compared to “pure”CPI); asset inflation has a malign circular relationship to finance in that higher prices (higher collateral values) drives higher debt that in turn creates new money that drives prices upwards…., until the liquidity flow slows that is and a destructive crash comes. Destructive also for wealth creating producing assets! And that is why normal business cycles should be allowed to play out.

Well you might say that some of all the new money created ends up in the productive sector. And yes of course, some does. But I would love to see a yearly graph monitoring debt taken for capital investments in relation to all debt issued and then compared to increase productivity for the last 30 years. I can assure you that you will see a strong relationship between the shrinking of the productive debt stock and slower productivity.

There are at least two different agencies whom comply economic data, the Census Bureauand of course the BEA, both within Commerce. Both have difference means of measuringeconomic data. Just as governmental units have two completely different annual budget. Diffusion and confusion. Furthermore, why is Labor tabulating the CPI?

Why is the BEA using disposable income in the first place? Why complicate an alreadydifficult task of fact finding and measuring taxes with this added step? Can anyone imagine the countless reams of taxes which effects disposable income? I can't. Why are not taxesconfigured in the CPI?

"This confirms that the burden of motor vehicle loans today is much less than it has been in the past. Consumers in general are in pretty good financial shape these days."

If this is true, then why do car leases account for one out of four new car sales? Whydo vehicle loans now average 72 months and many more at 84 months? They represent 8% of disposable income only because of the amortization has increased by nearly 100%. One caneffectively again reduce the percent by having 15 year car loans. It is at the expense (rape) of savers, which is driving the auto market sales and the new housing bubble sales.

"Nominal" interest rates has lost all value, as Fedzero continues to be the last lifelinefor this grand economic misjudgment.

Economists are no soothsayers, just axe the 300 hundred plus at the FRB, which can notget the economy on track despite it's partisan politics. They have no idea when the nextrecession is coming; were completely clueless about the housing crash; no alarm bells issued about the massive debt of the next coming defaults crisis in students loans. In less than two decades, the debt and unfunded liability crisis will be upon us and yourfriends at the FBR will be the only purchaser of Federal unit debt; as the dollar reachesa new recorder low.

Two things are certain. Liberalism and debt are synonymous; so too are Liberalism and economists.

Most of higher "education" is/are a function of a governmental unit. They are directlyresponsible for massive cost increases. And as usually when they create an issue orproblem they create another program to fix their original dysfunction; which in all toomany cases simply leads to another failure.

"In 1976, that truck, F150 the SuperCab model, had a manufacturer’s suggested retail price (MSRP) of $4,600. That was when the average working stiff earned $9,300 a year. So, it took 25 weeks of work to pay for the truck.

Today, the F-150 is still the preferred working man’s wheels. And today, it has a MSRP of $26,600 – or 5.7 times as much. But the average person doesn’t earn 5.7 times as much. The median wage today is $43,600. So now, a prole earning the median wage has to work 30 weeks to pay for the truck."

Finally, I am very optimistic for the future of the US economy -- Donald Trump will be our next President and the economy will restructured via tariffs on energy, consumer electronics, and textiles. The outcome will be higher prices and real opportunities for domestic manufacturing going forward. The grim story being told by the establishment is about to be reversed by Trump. Deficit spending will be ended once China and the world refuse to acquire US bonds in response to the tariff initiatives. Government spending will be cut to the bone as a result with no recourse to further national debt acquisition. There's no turning backward to the failed economy of the past 40 years. The establishment pundits will be lost in the noise!

PS: The end of US deficit spending is great news for the US economy -- industries that rely upon deficit spending will be wiped out once and for all -- the future will be great again for the American people -- bravo!

If this is a long and sustained recovery, then why is credit card debt at a new record high of 917 billion dollars? Would it not be prudent to pare down debt during a recovery?

http://www.cardhub.com/edu/credit-card-debt-study/#data-and-graphs

" The average household with credit card debt now owes $7,879 – the highest amount since the Great Recession and roughly $500 below the tipping point CardHub identified as being unsustainable.While credit card debt levels are trending significantly upward, charge-off rates remain near historical lows and are, in fact, down on a year-over-year basis. Something clearly has to give, and it does not seem to be our spending habits."